Franklin Square recently announced that it will be listing its first nontraded BDC, FS Investment Corp., on the New York Stock Exchange under the symbol “FSIC.. It is expected to list in April 2014.
FSIC was the first nontraded business development company (BDC) product in existence. Launched in 2009, FS Investment Corp. is a partnership between alternatives powerhouse Blackstone through its credit investment arm GSO Capital Partners and Franklin Square Capital Partners. The fund invests primarily in the senior debt of privately owned companies.
Franklin Square is the largest BDC manager with over $9 billion in assets under management across its funds. And upon listing, FSIC will be one of the largest traded BDCs with over $4.6 billion in assets under management and investments in over 180 companies.*
What has allowed Franklin Square to be so successful with this strategy?
Franklin Square’s success can be attributed to a number of factors. First, they created a new category for the BDC industry by being the first nontraded BDC in existence. Additionally, their timing was impeccable; they were buying debt and lending in 2009 and 2010, when every major bank was pulling back on credit lines and loans. This allowed them to acquire syndicated loans at very low values, which have subsequently been sold or are being held at or near par value. And finally, the team that Franklin Square assembled and the partnership with GSO/Blackstone were critical to gaining credibility and attaining attractive returns in the portfolio.
Implications for the Industry
For an industry that is only five years old, the listing of FSIC is a milestone event and one that will raise public awareness not only for nontraded BDCs but for the entire BDC industry.
This transaction may also get the attention of financial advisors and investors who are in search of above-average yields in a historically low-interest-rate environment. Nontraded BDCs are currently paying annual yields between 6.5% to 8.5%, while 10-year Treasury bonds are yielding roughly 2.7%.
Because it is common practice for BDCs to be managed externally and pay advisory fees even after they have completed an exchange listing, this liquidity event will be perceived as an attractive exit strategy for the broader nontraded BDC industry and perhaps set a precedent for others to follow.
*Data as of September 30, 2013.
The time (at Blue Vault's 2nd Annual Broker Dealer Educational Summit) proved extremely informative.